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I am a big fan of expanding the welfare state but I am also a big fan of reality-based analysis. For this reason, it’s hard not to be upset over yet another column telling us that the robots are taking all the jobs and that this will lead to massive inequality.

The first part is more than a little annoying just because it is so completely and unambiguously at odds with reality. Productivity growth, which is the measure of the rate at which robots and other technologies are taking jobs, has been extremely slow in recent years. It has averaged just 1.3 percent annually since 2005. That compares to an annual rate of 3.0 percent from 1995 to 2005 and in the long Golden Age from 1947 to 1973.

In addition, all the official projections from places like the Congressional Budget Office and Social Security Administration assume that productivity growth will remain slow. That could prove wrong, but the people projecting a massive pick up of productivity growth are certainly against the tide here.

But the other part of the story is even more annoying. No, technology does not generate inequality. Our policy on technology generates inequality. We have rules (patent and copyright monopolies) that allow people to own technology.

Bill Gates is incredibly rich because the government will arrest anyone who mass produces copies of Microsoft software without his permission. If anyone could freely reproduce Windows and other software, without even sending a thank you note, Bill Gates would still be working for a living.

The same applies to prescription drugs, medical equipment, and other tech sectors where some people are getting very rich. In all of these cases, these items would be cheap without patent, copyrights, or related monopolies, and no one would be getting hugely rich.

At this point, there are undoubtedly people jumping up and down yelling “without patent and copyright monopolies people would have no incentive to innovate.” This yelling is very helpful in making the point. If we have structured these incentives in ways that lead to great inequality and not very much innovation (as measured by productivity growth) then we should probably be looking to alter our structure of incentives. (Yes this is the topic of chapter of 5 of Rigged [it’s free].)  

In any case, this is the point. The inequality that results from technology is the result of our policies on technology, not the technology itself. Maybe one day the New York Times will allow a columnist to state this obvious truth in its opinion section.

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The New York Times has created an absurd dilemma for Democrats; "how to be tougher on trade than Trump." This framing of the trade issue is utterly bizarre and bears no resemblance to reality.

While Trump has often framed the trade issue as China, Mexico, and other trading partners gaining at the expense of the United States because of "stupid" trade negotiators, this has little to do with trade policy over the last three decades. The United States negotiated trade deals to benefit U.S. corporations. The point of deals like NAFTA was to facilitate outsourcing, so U.S. corporations could take advantage of lower-cost labor in Mexico.

The same was true with admitting China to the W.T.O. This allowed U.S. corporations to move operations to China and also made it possible for retailers like Walmart to set up low-cost supply chains to undercut their competitors. The job loss and trade deficits that resulted from these deals were not accidental outcomes, they were the point of these deals.

U.S. negotiators have also made longer and stronger patent and related protections (which are 180 degrees at odds with "free trade") central components of recent trade deals. While these provisions mean larger profits for drug companies and the software and entertainment industries, they do not help ordinary workers. In fact, by forcing our trading partners to pay more money for the products from these sectors, they leave them with less money for other exports.

Anyhow, given the reality of our trade policy over the last three decades it is hard to know what being "tough on trade" means. In the Trumpian universe (and apparently at the NYT) this could make sense, but not in the real world. The question is whether our trade policy is designed to help ordinary workers or to increase corporate profits, "tough" is beside the point.

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Last month’s GDP report also included revisions to previously reported profit data for the last three years. The earlier reports showed a slight increase in the profit share in 2018; the revised data showed that the profit share of corporate income had fallen by 0.4 percentage points from the prior year. This is important both because it means that workers are now clearly getting their share of the gains from growth and also because of what it tells us about the structure of the economy.

On the first point, we have seen four decades during which the wages of the typical worker have not kept pace with productivity growth.[1] While productivity growth has not been great over much of this period, it was slow from 1979 to 1995 and again in the years since 2005, the median wage has generally lagged annual productivity growth over most of this period.[2] 

The one exception was the years of low unemployment from 1996 to 2001, when the wages of the typical worker rose in line with productivity growth. With unemployment again falling to relatively low levels in the last four years, many of us expected that wages would again be keeping pace with productivity growth.

The earlier data on profits suggested that this might not be the case. It showed a small increase in the profit share of corporate income, suggesting that corporations were able to increase their share of income at the expense of labor, even with an unemployment rate below 4.0 percent. 

The revised data indicate this is not the case. The low unemployment rate is creating an environment in which workers have enough bargaining power to get their share of productivity growth and even gain back some of the income share lost in the Great Recession. In the last few years, wage growth has exceeded the rate of inflation by roughly one percentage point annually. This is not spectacular wage growth, but it is in line with, if not slightly above the rate of productivity growth.[3]

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There is a conventional wisdom on China’s currency that gets repeated almost everywhere and never seems to be challenged in the media. The basic story is that in the bad old days China ‘manipulated” its currency, but that stopped years ago. At present, its currency controls are actually keeping the value of its currency up, not down. As much as I hate to differ with the conventional wisdom, there are a few issues here that deserve closer examination.

First, it’s great see that everyone now agrees that China managed its currency in the last decade. (I prefer the term “manage” to “manipulate,” since the latter implies something sneaky and hidden. There was nothing sneaky about China’s undervalued currency. It had an official exchange rate that it bought trillions of dollars of foreign reserves to maintain.) Unfortunately, almost none of these people acknowledged China’s actions at the time, when the under-valuation of China’s currency was costing the United States millions of manufacturing jobs. Oh well, it wasn’t like the Wall Street bankers were losing their jobs.

The second point is that there is a common assertion that only the buying, not the holding, of reserves affects currency prices. It is easy to show that China is not currently buying large amounts of reserves. In fact, it has been selling some in recent years to keep its currency from falling.

Okay, let’s take a step back. The Federal Reserve Board bought more than $3 trillion in assets to try to boost the economy following the Great Recession. This was done to directly reduce long-term interest rates by increasing the demand for bonds. While it stopped buying assets several years ago, it still holds more than $3 trillion in assets.

Virtually all economists agree that by holding these assets, the Fed is keeping down long-term interest rates. If this additional $3 trillion in assets were on the market, then long-term interest rates would be higher. (The size of the impact is debated, but not the direction.)

If the holding (not buying) of assets has an impact on interest rates, why does China’s holding of more than $3 trillion in foreign reserves not have an impact on the price of the dollar and other reserve currencies relative to the RMB? (It would actually be well over $4 trillion if we add in the trillion plus dollars held in China’s sovereign wealth fund.)

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The New York Times ran a piece on China's devaluation of its currency, which warned that the move could hurt China because commodities like oil, which are priced in dollars, will become more expensive for companies in China. While it is true that the devaluation will make imported goods more expensive, the fact that some are priced in dollars is irrelevant.

Suppose oil was priced in yen. Other things equal, the decision to devalue against the dollar would also mean that the Chinese yuan is devalued against the yen. This would lead to the same increase in the price of oil as if oil were priced in dollars. The pricing in dollars is simply a convention, there is no special importance to it in international trade.

The piece also raises the prospect that the drop in the value of the yuan, "could spur wealthy Chinese to take their money out of the country." While it could have this effect, it may also have the opposite effect. Once the yuan has dropped in value the question is whether it is likely to fall further. This drop may lead many investors to believe that a further decline is unlikely, just as if the stock market fell by 20 percent, investors may come to believe that further decline is unlikely and therefore may be anxious to buy into the market.

It is also important to put the drop of the yuan in some context. The devaluation reduced the value of the yuan by less than 1.5 percent against the dollar. This is a large single-day movement, but it is not that unusual for currencies to move around by this amount against each other even without government intervention. Also, a 1.5 percent reduction in the value of the yuan will not have large effects on the price in China of oil or other commodities.

 

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Marketplace radio did a piece last week that was essentially just giving the argument of the supporters of the new NAFTA. I will give a few thoughts on the other side.

First, the fact that NAFTA played a substantial role in reducing the power of unions and lowering wages of workers without college degrees doesn't mean that we can reverse these effects by eliminating NAFTA.

The new NAFTA certainly does not eliminate the incentive to outsource jobs to Mexico to take advantage of lower-cost labor, but it does reduce it if we can count on its rules being enforced. However, this is not going to have more than a marginal effect on manufacturing employment and wages in the United States.

The jobs that are gone with few exceptions, are not coming back. There is also little reason to believe that manufacturing jobs that are saved through the new NAFTA will necessarily be high paying jobs. In 1994, when NAFTA went into effect, the average hourly wage for production and non-supervisory employees in manufacturing was 6.6 percent above the average for the private sector as a whole. In the most recent data, the average wage for manufacturing workers is 5.5 percent below. A fuller analysis that factors in health care and other benefits may still show a premium for manufacturing workers, but there is no doubt that it is much smaller than it was a quarter of a century ago.

Against the prospect of a small gain in manufacturing jobs, we have rules that lock in higher drug prices for the indefinite future. These rules could easily mean that patients in the United States and Canada and Mexico will pay tens of billions annually in higher drug prices. Just doing the math, we could easily be paying $2 or $3 million annually per manufacturing job saved. And, this is before even considering possible job loss in manufacturing due to the drain in purchasing power from higher drug prices.

In addition, the agreement locks in rules on the Internet that were designed to protect Facebook, Google, and other tech giants. I doubt anyone is satisfied that our current rules on Internet privacy and liability for spreading false information are adequate. How can it make sense to sign a treaty that could impair the ability of all three countries to adjust their rules? And, as with the rules on prescription drugs, the goal is to apply these rules to trade deals with other countries. 

These are the main reasons I view the new NAFTA as a net negative. It makes a bad deal worse.

 

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It is far too common for progressives to accept the right’s framing of economic issues. In the standard story, the right portrays itself as the champion of free markets. The image is of the rugged individualist who struggles against the current to come out ahead. They want to be able to make their way in business without the help or hindrance of the government.

In this story, liberals mess everything up by bringing in the government. They are so concerned that some people could get hurt that they bury businesses in bureaucracy and red tape, not only hurting profits but slowing growth and job creation, thereby hurting even the people they were trying to help. That is a worldview that is favorable to the right’s story – after all, who wants to stifle the economy?

I have written much to attack this worldview. My main point is that conservatives like the government just as much as liberals and progressives. The difference is that they want the government to act to redistribute income upward – and that they are smart enough to try to hide the role of government. That way they can say that their riches were just the result of talent and hard work. (This is the point of my book Rigged [it’s free].)

We got a great example of this turning of reality on its head in an otherwise excellent New York Times article on how it appears that Education Secretary Betsy DeVos intervened to ensure that a for profit college run by a political ally (Dream Center) could stay in business even after it was clear that it was about to go bankrupt. According to the piece, the Education Department’s actions allowed students enrolled in the school to continue to get government loans, even though there was little likelihood the school would survive long enough for them to graduate.

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I'm asking because in an otherwise very reasonable column on doctors' pay, Washington Post columnist Catherine Rampell suggests that if Medicare for All cut doctors pay, that they might "otherwise go into even higher-paying careers, like finance." In fact, almost all doctors are in the top two percent of the pay ladder for U.S. workers and many are in the top one percent. It is not plausible that the vast majority have higher-paying alternatives that they could otherwise pursue.

Doctors do go through years of training, and many work long hours. (They also have large debts from medical school, which is an issue, but grossly exaggerated.) Many other workers also have years of training and work long hours and get much lower pay.

In addition, there are hundreds of thousands of very smart and ambitious people elsewhere in the world who would be happy to study to U.S. standards and work for much lower pay than our doctors receive. They are prevented from coming here by protectionist measures.

For some reason "free traders" rarely seem bothered by protectionist barriers that inflate the pay of high end workers. In this case, these barriers cost us close to $100 billion annually, compared to a scenario in which doctors in the U.S. received pay that was comparable to pay in other wealthy countries. This is far more than the cost of Trump's tariffs, which have gotten economists quite excited.

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Readers must be wondering because it happens so frequently in contexts where it is clearly inappropriate. The latest example is in an article about the state of the race for the Democratic presidential nomination following the second round of debates.

The piece told readers:

"After a few candidates used the Detroit debate to demand that Mr. Biden account for Mr. Obama’s record on issues such as deportations and free trade, Mr. Biden was joined by some of the former president’s advisers, who chastised the critics for committing political malpractice."

The word "free" in this context adds nothing and is in fact wrong. The Obama administration did virtually nothing to promote free trade in highly paid professional services, like physicians' services, which would have reduced inequality. It only wanted to reduce barriers that protected less-educated workers, like barriers to trade in manufactured goods.

And, it actively worked to increase patent and copyright protections, which are the complete opposite of free trade. These protections also have the effect of increasing inequality.

Given the reality of trade policy under President Obama, it is difficult to understand why the New York Times felt the need to modify "trade" with the adjective "free." Maybe it needs to get this editing program fixed.

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No one expects serious budget reporting from the Washington Post, so we might as well have some fun with the ridiculous items it gives us under this pretext. It had a major article about the Senate approval of a bipartisan plan which it tells readers, "increases military and domestic spending by $320 billion over two years compared to existing law. It increases overall discretionary spending from $1.32 trillion in fiscal 2019 to $1.37 trillion in 2020 and $1.375 trillion in 2021."

So the gist of the story, as told in the first sentence, was that the deal "boosts spending," this is really only true relative to a baseline under which spending would be cut. The increases in law are actually slightly less than projected inflation over this period and considerably less than GDP growth, meaning that spending will decline as a share of GDP.

It would have been helpful to point this fact out to readers. The piece instead implies that this is an example of profligate spending.

To support this view, we get the quote from Florida Senator Rick Scott:

"I’m worried about the staggering debt we’re leaving for our children and grandchildren. ... Too often in Washington, compromise means both sides get everything they want so that no one has to make a tough choice. I can’t support that."

If Rick Scott were actually concerned about the burdens that the government is imposing on our children and grandchildren he should be looking at the costs of patent and copyright rents that result from these government-granted monopolies. These rents are running close to $400 billion a year in the case of prescription drugs alone. If we sum all the patent and copyright rents in the economy, it could exceed $1 trillion a year.

Granting patent and copyright monopolies is an alternative way for the government to pay for services as opposed to direct spending. Anyone who is seriously concerned about burdens created for our children would have to consider the cost of these monopolies. Otherwise, they are just looking to score cheap political points and richly deserve public ridicule.

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